Author Archive: Mike Jones

A traditional Co-location has certain advantages and for some customers it makes a great deal of sense. At least it does at first blush. Take a look:

Colo is cheaper than doing it yourself as physical infrastructure costs are shared across a number of customers.

The hardware is yours, not the co-location company’s. This means you can scale in the manner you please versus what suits the business model of the co-location company. The potential downside is that this assumes you were smart enough to pre-buy the space to grow into…

The software is yours, too. You are not limited to the management suite provided by the co-location company. Use what you wish.

Colo centers are usually more robust than a typical business environment. They deploy more physical security in an environment that is designed to properly manage power (multiple generators on-site for example) and the risks associated with fire and other natural disasters.

Upgrade paths are determined by you versus the hosting provider.

But what about the cost side of the equation? What does that look like? It goes without saying that it is (usually) cheaper to use a provider like SoftLayer to host your gear, but by how much? We have built a relatively simple model to get at some of these answers.

Colo pricing was based on $100 per U per month, or $2,500 per 40U rack per month cost. Colo capex assumed the same base configuration but at current market prices.

We assumed a $199 price point for SoftLayer’s small servers and $359 for large servers

Bandwidth consumption of 2500 GB per server per month (this is about 50% of what we see in house). A price of $50 per Mbps was used.

A refresh schedule of 50% at 36 months, 25% at 48 months and 25% at 60 months

So what do the numbers tell us? Well, I think it paints a pretty compelling picture for SoftLayer. The 60 month Total Cash Outlay (TCO) for Colocation is 131% of the SoftLayer cost.

Total Cash Outlay

Collocation

Softlayer

Initial Capital Expenditure (Cash Outlay)

$341,700

$0

Monthly Recurring Charges

$64,778

$60,450

60 Month TCO

$4,740,917

$3,627,000

In addition to the total cash outlay, we can add in a bunch of additional “hassle costs” – the hassle of driving to the DC in the middle of the night for an emergency, the hassle of doing your own software patching, setting up your own monitoring, waiting on hardware delivery (and you are not going to be first in line given your volumes are likely to be low compared to SoftLayer), the hassle of booking assets to the balance sheet, depreciation entries, salvage accounting entries, actual equipment disposal, downtime while you perform upgrades – ugh, the list is almost endless.

The argument for a SoftLayer solution is pretty strong based on the numbers alone. And I think that they ought to be persuasive enough for most to rethink a colocation decision. That said colocation decisions are not made from a cost perspective alone.

For example:

Issues around data integrity and security often drive companies to adopt a corporate philosophy that dictates co-location (or an on premise solution) over an outsourced solution. There is a deemed corporate need to have data / applications running over their own iron. Indeed, for many, colocation represents a significant and progressive decision.

Many companies have infrastructure in place and a decision will not be made to veer from the current solution until a technology refresh is in order. Never mind that fact that a transition to an outsourced solution (and this is the case when lots of things are outsourced, not just infrastructure) can generate significant internal anxiety.

Many outsourcing adoption models seem to show a similar trend. To a degree much of this becomes a market evolution consideration.

Adoption is very slow to start. Companies do not understand the new model and as a result do not trust vendor promises of cost savings and service delivery. To be fair to customers, service delivery for many solutions is poor at the beginning and cost savings often disappear as a result.

The vendor population responds to initial concerns regarding service delivery and perceptions around cost savings. Innovation drives significant improvements from a product and service delivery perspective. The solution now seems more viable and adoption picks up.

For some services (payroll is a good example), the cost savings of outsourcing the solution are realized across the marketplace with excellent service delivery and support being commonplace. We are close to mass market adoption, but some companies will opt to keep things in house regardless.

So where are we on the evolutionary curve? That is a difficult question to answer as there are numerous things to consider dependent upon where you want to look.

For most SMBs, outsourcing functions like HR/Payroll or their IT infrastructure is a no brainer – capital is not as readily available and existing staff is likely overburdened making sure everything else works. At the end of the day, the desire is to focus on running their business, not the technology that enables it. The decision is relatively easy to make.

As we go further up the food chain, the decision matrix gets infinitely more complex driven by an increase in geographic reach (local – national – international), an increase in the complexity of requirements, an increase in the number (and complexity) of systems being used and typically large IT organization that can be a terrific driving (or drowning?) force in the organization. The end result is that decisions to outsource anything are not easy to reach. Outsourcing occurs in pockets and SoftLayer certainly sees some of this where enterprise customers use us for a few things versus everything.

At the end of the day, the hosting market will continue to be multifaceted. All businesses are not alike and different needs (real or otherwise) will drive different business decisions. While I believe colocation will remain a viable solution, I believe that it will be less important in the future. The advantages presented by companies like SoftLayer only get more powerful over time, and we are going to be ready.

I have always had a fascination with economics going back to my college days. Some of my classmates and I used to spend hours discussing economic theory and poking holes in our professors’ beliefs, particularly those who followed John Maynard Keynes (insert your own political commentary/sarcasm here). It was a fun time and formed the basis for many of my beliefs about how business and the economy should be run. I even passed some of that passion on to my daughter who has a degree in economics.

As a student of economics, I try to read articles from as many of great economists of the past and present as I can given the constraints of having to work, raise a family, etc. One of my favorites is Walter Williams, a professor at George Mason University in Virginia and frequent contributor to blogs and various network broadcasts. In one of his recent articles, he used the example of a supermarket and the miracle that 60,000 items can come together under one roof and operate smoothly without Congressional meddling (again, insert your own political commentary/sarcasm here). It got me to thinking about SoftLayer and what goes in to provisioning one server in our datacenter. Think about all the manufacturers building the component parts, assembling those parts and shipping those parts via a truck which has its own component parts, assembling etc. to be able to transport those servers. Add to that all the networking gear, software, bandwidth etc and I would be willing to bet that thousands, maybe even millions of inputs and people are required to bring one server up and keep it running in a datacenter. And the whole process runs relatively smoothly and efficiently from start to finish.

How does that happen? In his article, Williams quoted Adam Smith, the acknowledged father of modern economics who said:

"He (the businessman) generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. ... He intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain."…"He is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. ... By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it." …"It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest."

From my perspective what Smith is saying is that more often than not, by pursuing our own goals and being greedy, we end up creating more value to society than when we actually try to do something good. Those motivated by profit tend to produce more value than those in the non-profit world (i.e., academia and government). Before you attack me, with what parts of your own life are you most satisfied? As Williams asked at the end of his article, are you more satisfied with the profit-motivated Wal-Marts, ebays, and Amazons of the world or the non-profit motivated schools, postal service, social security or motor vehicle registration? Who would you rather have in charge of your datacenter, the government or SoftLayer?

While we may not say it out loud, we are all greedy. And contrary to what certain segments of today’s society will have you believe, that is not necessarily a bad thing.

Over the last two years, SoftLayer has grown from nothing to over 10,000 servers and by the end of this year could surpass 30,000 servers if growth continues on its current track. A key component in managing this growth is finding leaders with the ability to scale as the company grows. More often than not, entrepreneurs are good at starting businesses but not good at growing them. In that vein, if you are the leader of a startup, what traits does your management team needs to have if one is to build the biggest, baddest and most valuable company in an industry?

Battle wounds: We all have read the stories about Bill Gates quitting Harvard to start Microsoft, Michael Dell selling servers out of his dorm room, and Larry and Sergey leaving Stanford to start Google. It is very rare that someone can come out of college and start something that becomes the dominant player in an industry. The majority are an amalgamation of our experiences of years of operating any one of a number of businesses. Look for the managers with some scars. Even the aforementioned entrepreneurs are pretty much battle tested by now.

Visionary: As fast as SoftLayer is growing, we better have a pretty good vision of where we are going so we don't run this Porsche off a cliff and into an abyss. We have seen many potential customer IT managers come to us in a panic upon their sudden realization that no more servers can be added to their datacenter because of inadequate planning for power and cooling. And I am not just picking on IT; this applies to the finance function as well. As the CFO, I have to have a vision for what my organization is going to look like all along the way, from the startup phase to an IPO, merger or acquisition or whatever other path this journey takes us.

Communication skills: Today's CFO must be more technically proficient than his predecessors; however, this does not negate for the financial or any other executive to be able to communicate not only with company staff, but customers, vendors, bankers and shareholders as well. As discussed in other blogs, the internet has given all of us the ability to communicate in so many different ways than in the past. The challenge of any manager is to figure out which method of communication is the most effective in a given situation to get the job done and keep the organization moving forward.

Je ne sais quoi: It's a French phrase we as Americans have used over the years to refer to a certain quality someone has that cannot be explained. A good manager has to have this “Presence”. While the internet and email and all forms electronic communication have made the world smaller, to have an impact a leader still needs to be out communicating, listening and understanding to keep the team on the right track. The leader who sits in his office all day can review a lot of data but needs to get out to find what is really going on inside a company. The “Ivory Tower” manager is doomed to failure in today's fast paced business environment.

Rock in times of adversity: For all of us who have participated in startups (and I have done four now), there are going to be tough times. You can count on that. How you react in those situations sends a message about your ability to lead to your staff. As a leader, you have to be the go-to person in tough times. Are you prepared to handle the adversity?

The team: Much like a professional hockey team (I would use football but my son plays hockey and this is my blog), you can't do it all alone. From the general manager on down, the owner/president of a team has to have the ability to attract top notch staff to who he can delegate the work of moving the organization toward the ultimate prize in hockey, The Stanley Cup. If he can't and tries to keeps all the work for himself, he will find himself on the outside looking in.

Do we have the team to scale? So far it appears that we do. Are we going to have to add additional leadership along the way for us to achieve our goals? Absolutely. We have just added a Chief Strategy Officer to the executive management team.

We continue to be confident our management team can provide the leadership needed to grow SoftLayer into an industry leader.

Just like any company, the search for ways to increase revenues and lower costs to make more money never ends. In the increasingly competitive hosting environment, raising prices is rarely an option but finding ways to cut costs while making the experience better for the customer can and must be done on an ongoing basis.

We have achieved some success to date with the provisioning of nearly 10,000 servers; however, the end game is far greater as the ultimate goal is to become a multi-national corporation serving markets all around the world. In the hosting space, you don't really have a choice, you either innovate and get bigger or you get out. The complexities are just too great to have the luxury of maintaining the status quo. The technology landscape is littered with companies that started reading their own press clippings and got fat, dumb and lazy. And keep in mind that copying your competitors only delays the inevitable; the "me-too" companies eventually go away. In the technology world, you must innovate and push the envelope to survive.

While we are constantly looking for new and better ways to serve the customer, a great deal of time is spent improving internal reporting systems. I work with a management team that understands the importance of budgeting and tracking various financial and operational metrics. To that end, we have made a substantial commitment in systems and people to gather data to help make the best decisions for us and most importantly, for our customers.

I would love to reveal all the data we have at our fingertips but for competitive reasons, I don't want to give away too much but let me leave you with this tidbit: I wonder how many of our competitors' CEOs can, from his/her desktop, drill down to any one of 10,000 servers in multiple data centers and know exactly how profitable each individual server is with the click of a mouse.

The best companies in the world are all supported by world-class accounting and finance departments providing pertinent financial and operational data to all its stakeholders. The right information gives you a tremendous advantage over your competition.

Find someone good to count and analyze your beans. Wal-Mart did and turned the world of retail on its head. With a little luck, we might be able to do the same to hosting.

For most, the common thread is that each has been accused or admitted to cheating in their respective sport. Barry Bonds for using steroids (and don’t tell me he didn’t use them); Bill Belichick for filming the Jets defensive signals; Shoeless Joe and Pete Rose for gambling; Tanya Harding for trying to disable her competition; Ben Johnson for steroid used to sprint faster than any other human being and Rosie Ruiz for only running half a marathon. All of them will forever be associated with scandal first and their accomplishments second.

But sport is not the only place where cheating is running rampant. The financial markets have been and continue to be rocked by financial scandal. We all know about the high profile cases like Bernie Ebbers (Worldcom) and Andrew Fastow (Enron) but a recent university study has shown that from 1978 to 2006, there were 788 Security and Exchange (SEC) and Department of Justice (DOJ) enforcement actions for financial misrepresentation or as the layman would call it, "cooking the books". In those actions, there were 2,206 individuals identified as being culpable for some or part of the financial fraud. While all the sports figures above had their reputations tarnished, only some of them have suffered financial hardship and if I remember correctly, none served jail time for their initial actions. For financial misrepresentation, the penalties are far more severe. Over 93% were fired or left their jobs with another 31% barred from future employment as an officer of director of any publicly traded company. In addition, 617 of these individuals have been charged with criminal violations; 469 were found guilty and sentenced to an average of 4.3 years in jail and 3 years of probation. Needless to say, their financial position suffered as well. On average, these managers lost $15.3 million in stock value once the scandal was revealed and paid $5.7 million each in SEC fines.

Cheating never comes to good end. Most scandals generally start small, then greed sets in and the rest is history. Is cheating worth it? Even if you don't get caught, you will always be looking over your shoulder. And sometimes scandals can occur even with the best of intentions. Compared to other industries, hosting is still in its infancy and is just beginning to address the provisions of Sarbanes-Oxley. Who knows what kind of accounting and operational issues will come to the forefront as some of the leaders in the industry enter the public markets?

Around here we foster an environment of honesty and integrity. What are you doing in your company? How do you want your company to be perceived in the marketplace? Are you ready to face the public scrutiny of the SOX generation? Your customers and the markets are watching.

Thanks to my financial brethren at Enron, Worldcom, Barings, BCCI and all the companies currently embroiled in the stock back-dating scandals, I have sit through an ethics seminar every other year to maintain my status as a certified public accountant.

In my position as Chief Financial Officer, ethics and integrity are of paramount importance and as a company, we work hard to hire staff with these characteristics. Keeping that in mind, a survey was taken in 2005 by Deloitte and Touche of American youth between the ages of 13 and 18 in which they were asked the question, “If your boss told you to do something you thought was unethical, would you do it anyway”? An astounding (at least to me) 53% of the kids said they would do what their boss asked them to do.

As a technology company with a work force that gets ever younger as kids become more and more technologically savvy, that is frightening statistic. However, what it points out is the need for us to set the behavioral standards and to train our staff in what those standards are.

What are those standards? For every company those will differ somewhat but a recent survey points out the types of unethical behavior every company faces on a daily basis. In 2005, the American Management Association’s Human Resources Institute asked companies why their employees behaved unethically. The top five reasons:

Pressure to meet unrealistic business objectives

Desire to further one’s career

Desire to protect one’s livelihood

Working with a cynical, demoralized environment

Ignorance that the act was unethical

We have all faced having to make decisions in light of one or more of those five reasons at some point in our lives. How we have reacted to those situations has helped define each of us as we moved through our careers.

How will you know what the ethical choice is when you are trying to make a decision? Let me leave you with one final quote from Potter Stewart, former U.S. Supreme Court Justice on his definition of ethics:

Ethics is knowing the difference between what you have a right to do and what is the right thing to do.

Are you doing the right thing? And are you demonstrating that to your peers and those you lead? The world is watching.

I am the least liked guy in the whole company. I am the one who has to say no. No to the fully enclosed domed cubicles with sliding doors and skylights. No to the quad processor quad core desktop PCs. No to 6 flat screen 30 inch monitors for each developer (3 is plenty). No to the recumbent Herman Miller massage desk chairs. No to the offices large enough to fly more than 3 RC toys at any one time. No to the “must haves” outside the budget. In short, I am the evil CFO. Some have even called me Iron Fist.

In spite of my constant no’s, we have built an amazing culture of innovation by saying "yes", a lot more often than saying "no" over the last two years.
Here are some of the things we've said yes to:

Yes to 10 of us starting the company when no one believed we had a prayer of surviving.

Yes to outside investment.

Yes to going ahead with the idea of a private network.

Yes to building out data center space not knowing when or if we would ever see that first customer.

Yes to not taking salary the first year to get the business started.

Yes to investing in programmers to build a portal that gives customers what they want.

Yes to spending extra money on infrastructure to allow us to build server farms on a scale never seen before.

Yes to the API project.

Yes to giving our developers time to be creative and come up with new ideas.

Yes to Muenster Fest!! (Lavosby or Samf can explain in a future blog)

In the future, I hope to be able to share more with you from a financial standpoint about how we make this business work.